TCS Q3 Results Preview: Expect muted earnings growth; deal wins, outlook on near-term demand to be in focus

Tata Consultancy Services (TCS) is expected to report a tepid growth in revenue and profit after tax (PAT) for the third quarter of the current financial year (Q3FY24) on account of the prevailing weakness in discretionary spending in key markets in the West.

Apart from the numbers, deal wins, outlook on near-term demand and BFSI segment are the key monitorables.

For Q2, TCS reported an 8.7 per cent year-on-year rise in its consolidated net profit (attributable to shareholders of the company) at ₹11,342 crore. Operating margin saw a nominal expansion of 0.3 per cent YoY at 24.3 per cent. Its Q2 growth was led by the energy, resources and utilities vertical which grew 14.8 per cent while manufacturing grew 5.8 per cent and life sciences and healthcare grew 5 per cent during the quarter.

On the other hand, BFSI (-0.5 per cent), communications and media (-2.1 per cent) and technology and services (-2.2 per cent) degrew during the second quarter.

Also Read: Q3 result preview: IT firms expected to post muted revenue, subdued profit amid weak demand

We collated the views of five brokerage firms on what they expect from TCS’ Q3 earnings. Here’s what they say:

The brokerage firm expects TCS to report a 7 per cent YoY growth in reported PAT and 2.5 per cent YoY growth in overall revenue in the Indian rupee terms.

IT services revenue in dollar terms may see a decline of 0.7 per cent quarter-on-quarter (QoQ).

“The growth is expected to stay muted due to furloughs and weak macros. Expect 0.4 per cent QoQ CC (constant currency) growth for Q3. EBIT percentage is expected to see a marginal improvement of 20 bps QoQ due to the absence of operating leverage,” said Motilal Oswal.

The brokerage firm expects the deal pipeline to remain resilient, especially in the UK regions, while the US and Europe continue to stay on a weaker trajectory.

Also Read: Q3 likely to be last weak quarter, expect revenue growth for Indian IT firms from Q4: BNP Paribas

Kotak Institutional Equities

Kotak expects TCS’ net sales to grow 3.6 per cent YoY while reported PAT could grow 8.4 per cent YoY.

Kotak expects 0.5 per cent QoQ and 1 per cent YoY growth in constant currency. Kotak’s estimates include $50 million or 0.7 per cent contribution from the BSNL deal.

“We expect muted overall revenue growth due to furloughs in hi-tech and financial services. We expect a 30 bps increase in the EBIT margin, despite weak revenues due to rupee depreciation and aggressive cost management. We expect moderate deal wins of $8.5-9 billion. The quantum of deals announced has been muted, especially in the North American market,” Kotak said.

“The focus will be on the outcome of the client budgeting cycle for 2024. Expectations are high about a revival in spending. We expect investor focus on—(1) the outcome of the annual client budgeting exercise, especially in the critical financial services vertical, (2) the state of spending in the impacted North America market and the financial services, hi-tech & telecom verticals, (3) pipeline of deals, (4) state of discretionary spending and what it would take to revive the same, (5) the impact of GCC ramp-up on growth of companies and (6) levers to defend and increase margins,” said Kotak.

Also Read: Q3 Result: India Inc. may deliver moderate profit, negative surprises unlikely; here’s what experts say

Sharekhan by BNP Paribas

Sharekhan expects TCS to report muted revenue growth at 0.3 per cent in CC terms due to furloughs offset by the contributions from the BSNL deal.

EBIT margins, as per the brokerage firm, are likely to improve by about 25 bps QoQ, aided by operating efficiencies partially offset by muted revenue growth.

Nuvama Institutional Equities

Nuvama expects TCS to deliver 0.5 per cent CC revenue growth and 0.1 per cent USD growth, QoQ. Growth excluding the BSNL deal may be flattish QoQ.

“We expect margins to remain flat QoQ. We expect a strong deal-wins streak to continue, with a cautious commentary. Commentary on client spending and AI will be keenly sought,” said Nuvama.

Phillip Capital

Phillip Capital expects CC revenue growth of 0.7 per cent QoQ. Modest growth due to furloughs in BFSI and hi-tech sectors and weakness in discretionary spending.

“We expect TCVs to moderate in Q3 after strong TCV in Q2. Margins are expected to increase marginally by 20bps. Impact of furloughs will be offset by cost-efficiency measures and rupee depreciation,” Phillip Capital said.

Budget comments for the calendar year 2024, demand commentary, deal ramp-up visibility, vertical commentary, deal TCVs and pipeline and margins outlook are the key things to watch out for in TCS earnings, according to the brokerage firm.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.